BEIJING - To
help ease its oil shortage while reducing its
increasing reliance on oil imports, China is
putting effort and money into research and
development (R&D) for new sources of energy,
in addition to speeding up its ambitious
coal-to-liquid (CTL) fuel projects, intended to
convert the country's abundant coal resources into
liquid fuel.

There are now signs that the
Chinese government is increasing its support for
biomass energy, and development of fuel ethanol as
a kind of biomass energy is entering a
rapid-growth stage. Due to the peculiarities of
renewable energy, to industrialize production of
various kinds of renewable energy, including fuel
ethanol, needs policy support from the government,
especially during the

preliminary stages.

China's 11th Five-Year Plan for Social and
Economic
Development
(2006-2010) clearly stipulates that the production
capacity of fuel ethanol will be expanded over the
next five years.

In a national conference
on financial affairs held in Shaoxing, Zhejiang province, early
this month, Vice Minister of Finance Zhu Zhigang
stressed it was now an important task of his
ministry to give financial support to R&D and
practical application of various kinds of
renewable energy, such as biomass energy, solar
energy and wind power.

It is worth noting
that in his talk, Zhu mentioned biomass first.
Previously, China had always put wind power first
in government documents concerning renewable
energy development. This indicates that as the
wind power industry matures, China is shifting its
focus of official support for renewable energy to
biomass energy.

The Ministry of Finance
(MOF) will establish a special fund for
development of renewable energy, and the MOF and
the National Development and Reform Commission
(NDRC), China's top economic planning body, are
promulgating specific rules on the operation of
the fund, according to informed sources.

The MOF and NDRC have listed biomass
energy as the No 1 target to support. Biomass
energy includes ethanol, biogenic diesel fuel
(biodiesel), biomass power generation and methane.

NDRC officials think that China has mature
and large-scale production facilities for alcohol,
and therefore possesses the technical foundation
for developing fuel ethanol. China began to
develop fuel ethanol in the late 1990s by making
use of surplus grain.

In the 10th
Five-Year Plan period (2001-2005), China
constructed fuel ethanol plants built to use stale
grain as the raw materials in Henan, Anhui, Jilin and Heilongjiang provinces,
with a combined annual production capacity
reaching 1.02 million tonnes.

Ethanol-based fuel is now available on
markets across five provinces and in 27
prefecture-level cities in another four provinces.
Ethanol fuel now accounts for a significant
percentage of China's total oil consumption.

The NDRC submitted a report to the State
Council in May this year, suggesting promoting the
use of ethanol oil in the three municipalities
directly under the central government - Beijing, Shanghai and Tianjin - as the next
step to increase the usage of renewable biofuels.

Previously, the NDRC had organized an
appraisal meeting, which concluded that developing
6 million tons of biofuel ethanol in the "11th
Five-Year Plan" period would not threaten China's
grain security. However, if ethanol fuel developed
rapidly, it could use grain as the sole raw
material, NDRC sources said. Low-cost crops should
also be developed as raw materials.

Experts estimate that the domestic supply
of sorghum, cassava and sugarcane can meet the
demand for raw materials to produce 30 million
tons of fuel ethanol at present. In fact, China
has launched ethanol production with sorghum as
raw materials in Heilongjiang, Inner Mongolia, Shandong, Xinjiang and Tianjin on a
trial basis.

The experimental projects in
Heilongjiang are capable of producing 5,000 tonnes
of ethanol a year at present. Though China has
industrialized production of fuel ethanol with
grain as the raw material, fuel ethanol production
with sorghum as a raw material is still in the
testing stages.

The production cost of
fuel ethanol is high at present. The cost is about
4,500 yuan (US$563) per tonne with stale grain as
the raw material, and some 4,000 yuan per tonne
with sorghum or cassava as raw materials.

Under such circumstances, fuel ethanol is
only profitable when oil prices rise above 6 yuan
per liter. China appropriates 1.5 billion yuan in
financial subsidies to fuel ethanol production
each year at present. Therefore, biological fuel
costs and the possibility of a decline in oil
prices will be the main curbs to the development
of biofuels.

In the meantime, China is
also speeding up its CTL projects. China's largest
coal producer, the state-owned Shenhua Group, has
joined hands with Sasol to set up two CTL plants
in Northwest China, Shanghai Securities News
reported over the weekend.

Sasol, based in
South Africa, is the world leader in producing
fuel from coal. The multinational has produced
fuel in South Africa equivalent to more than 1.5
billion barrels of oil.

The two firms have
signed two agreements. One was to proceed with a
feasibility study for an 80,000 barrels per day
potential CTL project in Shaanxi province. The
other similar one is for a 80,000 barrels per day
CTL project in the Ningxia Hui Autonomous
Region.

The initial pre-feasibility
studies of the two projects have confirmed that
all the key drivers are in place for establishing
a viable CTL business in China using Sasol's
unique Fischer-Tropsch technology, said the Xinhua
news service.

Each plant is expected to
cost more than US$5 billion. They could be brought
into operation by 2012 if the CTL projects go
ahead, newspapers Sasol as saying. Coal accounts
for more than 84% of China's energy reserves, and
experts have said that boosting CTL projects in
China was the most practical way for the country
to achieve self-sufficiency in oil supply.